The harder they fall

In living memory, those two words have never before been uttered by an official of the country’s largest bank and mortgage lender, so this is a big deal. Here’s exactly what RBC’s senior economist, Robert (Mayday! Mayday!) Hogue told bank clients in his analysis of what happens next for Canadian real estate:

“We believe that the new measures – that include more stringent and uniform qualifying rules for mortgage insurance across mortgage types – will both speed up and harden the landing that we previously expected to occur in the year ahead, although they are unlikely to cause a crash.”

So, what’s a ‘hardened landing.’ What’s a ‘crash’? What, exactly, is the bank telling us to expect?

The definitions are hazy, fluid and ill-defined, but we know this: the benchmark of a ‘crash’ is now the American experience of 2006-10, when the housing market peaked on excessive debt, over-borrowing and bloated prices, then tumbled for an average price drop of 32% across the nation. It then took a decade before valuations were largely restored, although trillions in equity were forever lost by millions of families. We also know some areas of the States (Phoenix or south Florida, for example) saw price plops of up to 70% in certain zip codes. These had been the epicentres of speculation and bubbly markets.

So RBC says it’s ‘unlikely” we’ll repeat that experience. That’s good. It would drop the average Canadian house by $156,000. The typical detached in Toronto would shed $429,000 and in Van a SFD would be worth almost $500,000 less. But if the US experience were to hold sway here – markets with super-sized gains ending up with King Kong losses – the carnage in the GTA and YVR would be worse. On the West Coast, terminal.

But, relax. The bank says that’s unlikely. Not impossible. Just (fingers crossed) not a certainty.

So how hard is a ‘hardened landing’?

Even Royal LePage boss Phil Soper is hinting at something bigger around the corner. He’s just called the diminishing year/year gains made in Vancouver that market’s “final hurrah.” It kinda evokes General Custer, doesn’t it? Or the charge of the Light Brigade, or Mike Pence’s career. Sales dropped another 23% last month and in the last two months YVR has already recorded the biggest price plunge in history. Foreign buyers have split. Speculators have vanished. The locals are sitting on their hands. And all that came even before Wild Bill Morneau dramatically raised the bar for moister mortgages, while lowering the boom on the brokerage industry.

An already-teetering market, adds Soper (this time switching to a sports motif), doesn’t need much of a push to fold completely.

“You take a lineman in professional football — a great, big human being — and they’re sort of teetering on their heels. A child comes along and pushes them on their chest and they topple over.”

That’s what the foreign buyers tax did, he says. And the tough-guy mortgage changes which come into effect tomorrow (Monday, October 17th) are likely to have an even more consequential impact.

This is what a hard landing is made of. The federal government itself estimated the impact on sales nationally to be about 8%. Mortgage brokers figure the average moister couple will be able to afford about $150,000 less in mortgage financing, so instead of shopping for a $650,000 house, they’ll be in the $500,000 range. That, of course, means $650,000 houses will eventually become $500,000 houses – since it was cheap money that sent things in the other direction.

A reasonable expectation, then, is a decline 50% less severe than that which tanked America – because we’re (of course) special. So a hard landing might well equate to 15% or a tad more. But not across the whole country. Moncton, Trois Rivieres, Windsor or Estevan will probably see no movement in the needle. Toronto, with its giant economy and undiminished in-migration, likely a 5% to 10% erosion, depending on the hood. Victoria is at risk for a 20% decline over time, and Greater Van will be lucky to escape with a 35% haircut.